Investors have kept the share prices of PayPal Holdings, Inc. (PYPL) range bound ahead of the announcement of its fiscal second quarter earnings report. With a growing number of out-of-the-money call options in the open interest, it appears that option traders are expressing optimism toward a potential positive move. The unusual option trading may create a strong upward trend in the price action if PYPL delivers a positive earnings surprise.

A sizable collection of call options seems to be growing in the open interest for PYPL, and option premiums are unusually high right now. Option trading volumes indicate that traders have been buying calls and selling puts in anticipation of a positive earnings announcement. Unwinding these bets could create downward pressure on the price of PYPL.

It is difficult to correctly predict the direction a stock will move after earnings. However, a juxtaposition of the price action between option trading activity and stock prices shows that, if the company delivers a negative report, PYPL shares could fall significantly, closer to its 20-day moving average in the first few days after the announcement. This is possible because options are priced for a small move, but unexpected poor news could catch traders off guard and create a swift decline in share price.

Key Takeaways

  • Traders and investors have bid up PayPal share prices nearly to an extreme range headed into the earnings announcement.
  • The share price has been closing above its 20-day moving average, having recently found its all-time high.
  • Call and put pricing is predicting a stronger move upwards.
  • The volatility-based support and resistance levels allow for a stronger move to the downside.
  • This setup creates an opportunity for traders to profit from unexpected earnings results.

Option trading represents the activities of investors who wish to protect their positions or speculators who want to profit from accurately predicting unexpected moves in an underlying stock or index. That means option trading is literally a bet on market probabilities. By comparing the details of both stock and option price behavior, chart watchers can gain valuable insight, although this price behavior is better understood within context. The chart below shows the price action for the PYPL share price as of Tuesday, July 26. This depicts the setup leading into the earnings report.

Earnings pricing for PayPal Holdings, Inc. (PYPL)

Current Trends

The one-month trend of the stock has the shares remaining in an elevated range above the 20-day moving average. Notably, over the past month, the highest PYPL share price was roughly $310 in late July, as PYPL briefly touched its all-time high. The lowest PYPL share price over this time period was around $288 in early July. The price closed in the upper region depicted by the technical studies on this chart.

The studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way the price has moved around but mostly held in an average, elevated range all month. This price move from PayPal shares implies that investors have expectations of a large change from the upcoming report.

Tip

The Average True Range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.

In this context where the price trend for PYPL has been holding in the middle of an elevated range, chart watchers can recognize that traders and investors are expressing confidence going into earnings. In the week before earnings, the share price gradually declined, before rising above the 20-day expected moving average the next week. That makes it important for chart watchers to determine whether the move is reflecting investors' expectations for a favorable earnings report or not.

Option trading details can provide additional information to help chart watchers form an opinion about investor expectations. Recently, option traders are favoring calls over puts by a slim margin; however, the open interest on options has a greater number of calls than puts. This normally suggests that investors are expecting good news from the company report, as they are buying calls and selling puts. However, in this circumstance, traders are expecting that PYPL won't move strongly, up or down, after earnings.

Tip

The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.

Trading Activity

Option traders that PYPL shares are elevated and have priced their options as a bet that the stock will close within one of the two boxes depicted in the chart between today and July 30, the Friday after the earnings report is released. The green-framed box represents the pricing that the call option sellers are offering. It implies a 35% chance that PayPal shares will close inside this range by the end of the week. The red box represents the pricing for put options with a 33% probability if prices go lower on the announcement.

It is important to note that the open interest featured over 263,000 call options active compared to nearly 298,000 put options, demonstrating the bias that option traders had, as puts outweighed calls. This normally implies that option traders expect a decline in price. However, because the call box and the put box are relatively equal in size, it tells us that the nearly equal percentage of call and put options has not skewed expectations higher or lower. This circumstance implies a far more complacent outlook.

Option pricing for PayPal Holdings, Inc. (PYPL)

The purple lines on the chart are generated by a 10-day Keltner Channel study set at four times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.

The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with more space to run to the downside. This suggests that option buyers don't have a strong conviction about how the company will report, even though the number of call options in the open interest is growing. Although investors and option traders do not expect it, a surprising announcement would push prices dramatically in either direction.

Volatility pattern for PayPal Holdings, Inc. (PYPL)

These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that any news, surprisingly bad or good, will catch investors by surprise and could generate an unusually large move. After the previous earnings announcement, PYPL shares rose by 1.9% in the day following, then dropped the following week. Investors may be expecting a different kind of move in price after this announcement. With lots of room in the volatility range, share prices could rise or fall more than expected, but there is more room in the range for prices to move lower.

Market Impact

As a bellwether stock, PayPal's earnings can have a direct effect on earnings prices. No matter what the report says, it will likely have an impact on stocks in the financial sector. A positive report could lift other stocks in the sector such as Visa Inc. (V) or Mastercard Incorporated (MA). It could also affect exchange-traded funds (ETFs) such as Invesco's QQQ Trust ETF (QQQ) or State Street's S&P 500 Index ETF (SPY).